case 3:05-cv-00471-JVB-CAN document 64 filed 12/02/05 page 1 of 9
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`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF INDIANA
`SOUTH BEND DIVISION
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`CAUSE NO. 3:05-cv-471 AS
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`))))))))))
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`PATRIOT HOMES, INC. and
`PATRIOT MANUFACTURING INC.,
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`Plaintiffs,
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`v.
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`FOREST RIVER HOUSING, et al.,
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`Defendants.
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`REPORT AND RECOMMENDATION
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`I.
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`Introduction
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`On August 5, 2005, the Plaintiffs Patriot Homes, Inc. and Patriot Manufacturing
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`(hereafter Patriot) filed their complaint and motion for a preliminary injunction. On August 24,
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`2005, the Honorable Allen Sharp conducted a status conference on the Plaintiffs’ motion for a
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`preliminary injunction and referred that motion to the undersigned pursuant to 28 U.S.C.§§631-
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`639, to conduct an evidentiary hearing and issue a Report and Recommendation. After a brief
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`period of discovery, an evidentiary hearing was held on the Plaintiffs’ motion for preliminary
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`injunction on October 3, 2005 and on October 11, 2005. The following Report and
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`Recommendation is based upon the record of this case which includes the pleadings, the
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`motions, and briefs of the parties, as well as the evidence developed at the hearing, and the
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`arguments of counsel.
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`II.
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`Procedural Background
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`In late 2004 and early 2005, several key Patriot employees, including the four named
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`Defendants of this lawsuit, left Patriot and joined Sterling, a subsidiary of Forest River Housing.
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`Patriot charges that the four former employees took with them certain proprietary information,
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`case 3:05-cv-00471-JVB-CAN document 64 filed 12/02/05 page 2 of 9
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`violated the Plaintiffs’ copyrights, and disclosed the trade secrets of their former employer,
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`Patriot, with their new employer, Sterling.
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`Plaintiffs initially filed a lawsuit in Elkhart County Superior Court, and on August 5,
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`2005, the Plaintiffs filed the present lawsuit in this court alleging a violation of the Computer
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`Fraud and Abuse Act, (CFAA) 18 U.S.C. § 1030 (2000), copyright infringement pursuant to 17
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`U.S.C. § 501 (2000), and the improper disclosure and use of the Plaintiffs’ trade secrets.
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`Initially, this dispute was proceeding simultaneously in both the state and federal courts. As of
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`this writing, it is unclear whether the parties continue to litigate in the state court or whether that
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`action has been stayed by that court, by order or the agreement of the parties.
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`The Plaintiffs base jurisdiction on 28 U.S.C. § 1338(a) (2000) and 28 U.S.C. § 1331
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`(2000), alleging a violation of the CFAA and their federally protected copyrights. However, the
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`Defendants have challenged this court’s jurisdiction and have filed a motion to dismiss pursuant
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`to FRCP 12(b)(1). That motion is now fully briefed and pending before the Court. Because that
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`motion has not been referred to the undersigned, it is not the subject of this Report and
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`Recommendation.
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`III.
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`Facts
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`In early 2005, the four individual Defendants, Brent Raifsnider, William Milliken, Steven
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`Ryker and Daniel Reed, left the employ of Patriot and went to work for the Defendant, Sterling.1
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`All had been high level employees at Patriot. Raifsnider had been the General Manager,
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`Milliken the Modular Engineering Manager, Ryker a Production Engineer and Reed the Sales
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`1Apparently Sterling, a new company, was attempting to “get up and running” as soon as
`possible and hired very senior employees from Patriot to expedite their entry into the market.
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`2
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`Manager.2 As key employees of the Plaintiff, these Defendants had access to the Plaintiffs’ most
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`sensitive information and copyrights.
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`Following the executive exodus, the Plaintiffs hired a forensic computer analyst, Robert
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`Avie, to determine if, and to what extent, the Defendants had copied the Plaintiffs’ sensitive
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`proprietary information to their own computer systems. Avie testified that his analysis of the
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`Defendant’s computer system revealed that hundreds of the Plaintiffs’ computer files had been
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`downloaded and copied to Sterling’s computer system. Specifically, Avie found Patriot
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`information in every single system he analyzed at Sterling and determined that at least 237
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`AutoCAD drawing files were taken from Patriot to Sterling. Avie discovered that Patriot's
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`AutoCAD drawing folder was also copied at several systems at Sterling, backed up, and
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`modified to include Sterling's title block.
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`Avie also performed a Hash analysis, which compares the numerical values of two files.
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`If those values match, it can be concluded with “extreme certainty” that one file is an exact copy
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`of another. Avie found approximately 424 files at Sterling that matched Patriot files, and he
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`visually reviewed approximately 200 of these files, presenting the Court with "representative
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`samples." Avie also performed a Key Word Search, searching for the words "Energymate" and
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`"Patriot" in Sterling's files within the binary data. Almost 800 Sterling computer files have the
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`word "Patriot" in them.
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`Avie’s testimony was largely unrefuted and convincingly established that someone had
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`downloaded and copied hundreds of the Plaintiffs’ computer files and installed them into the
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`Defendant’s computer system.
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`2Although not a defendant in this action, Patriot’s Production Manager also joined his
`four colleagues at Sterling.
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`3
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`case 3:05-cv-00471-JVB-CAN document 64 filed 12/02/05 page 4 of 9
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`Patriot has copyrighted six of its floor plans as “technical drawings.” While the
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`Defendant’s challenge the validity of the copyrights, no evidence was presented that would
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`invalidate them. Rather, the Defendants attempted to rebut the presumption of validity of only
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`two of the six copyrights, arguing that Patriot’s 5856 is a copy of Hart Housing model 42019,
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`and Patriot’s 3933 is a copy of a Unibilt model. The remaining copyrights were unchallenged.
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`The Defendants do not really challenge the essential facts;3 that key employees of Patriot
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`left Patriot and now work for Sterling, or that hundreds of Patriot’s computer files containing
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`sensitive proprietary information were found on the Defendant’s computer system. Rather, the
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`Defendants offer legal arguments that (1) the CFAA is not applicable to these facts, (2) the
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`copyrights were not valid, and (3) the information contained in the computer files were not trade
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`secrets and are not legally protected materials. The Defendants also argue that when they
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`learned of the misappropriated computer files, they isolated the material and created a “clean
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`room” where no Patriot material was to be used. Indeed, Sterling hired T. R. Arnold, an outside
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`firm, to write a systems and quality control manual “from scratch”, unaffected or “untainted” by
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`the stolen Patriot computer files. The basis for this argument is questionable. Although Roger
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`Kollat, President of Forrest River Housing, testified that the Defendants are not using the
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`materials or data contained on the copied Patriot computer files, another Defendant testified
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`otherwise. In his deposition, Milliken admitted that Sterling is “currently using” Patriot’s
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`3The Defendants state in their post hearing brief “There is no evidence as to how or why
`those files came to be on the Sterling computer.” Given the fact that those witnesses who would
`have first hand knowledge refused to answer specific questions on this subject, for fear that the
`truthful answers might subject them to criminal prosecution, and given Mr. Avie’s persuasive
`and uncontradicted testimony, the court is very comfortable in “connecting the dots” and
`concluding Patriot’s former employees copied and downloaded the computer files and
`transferred them to Sterling’s computer system. For the Defendants to argue “[t]here is no
`evidence how or why those files came to be on the Sterling computer” is disingenuous at best
`and insulting at worst.
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`production drawings and asserted his Fifth Amendment right against self-incrimination when
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`asked whether Patriot’s AutoCAD drawings are “currently being used” by Sterling.
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`IV.
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`Legal Analysis
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`A plaintiff requesting injunctive relief under Fed. R. Civ. Pro. 65 must demonstrate that:
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`A.
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`B.
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`C.
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`The plaintiff will be irreparably harmed if the injunction does not
`issue;
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`The threatened injury to the plaintiff outweighs the threatened
`harm the injunction may inflict on the defendant;
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`The plaintiff has at least a reasonable likelihood of success on the
`merits; and
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`D.
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`The granting of an injunction will not disserve the public interest.
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`Reinders Brothers v. Rain Bird Eastern Sales Corp., 627 F.2d 44, 48 (7th Cir. 1980).
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`A.
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`Irreparable Harm
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`1.
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`Copyright Infringement
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`With respect to Patriot’s copyright infringement claims, “irreparable injury may normally
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`be presumed from a showing of copyright infringement.” Wainwright Securities, Inc. v. Wall
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`Street Transcript Corp., 558 F.2d 91, 94 (2d Cir. 1977), cert. denied, 434 U.S. 1014 (1978); see
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`also Educational Testing Servs. v. Katzman, 793 F.2d 533, 543 (3d Cir.1986); Apple Computer,
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`Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1254 (3d Cir.1983), cert. dismissed, 464 U.S.
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`1033 (1984).
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`To establish infringement, Patriot must prove: "(1) ownership of a valid
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`copyright, and (2) copying of constituent elements of the work that are original." Feist
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`Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 361 (1991) (citing Harper &
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`Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 548 (1985)). Patriot need not prove
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`damage, or any harm, resulting from the infringement. 1 M. NIMMER, NIMMER ON COPYRIGHT
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`§13.01 (citing Davis v. The Gap, Inc., 246 F3d 152, 159 (2d Cir. 2001)). Patriot has carried
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`its burden.
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`Patriot owns six copyrights under Title 17 of the U.S. Code. Title 17 United States Code
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`Section 410(c) provides that:
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`[i]n any judicial proceedings the certificate of a registration made before or
`within five years after first publication of the work shall constitute prima
`facie evidence of the validity of the copyright and of the facts stated in the
`certificate. The evidentiary weight to be accorded the certificate of a
`registration made thereafter shall be within the discretion of the court. [17
`U.S.C. § 410(c).]
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`A number of registrations in issue are entitled by statute to a prima facie presumption of
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`validity. The remaining copyrights, although not fully within the five-year period to be entitled
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`to an automatic presumption, are all issued to related works, so that any question of their being
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`copyrightable subject matter is contradicted directly by the actions of the Copyright Office.
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`Copyrightability of the subject matter has been clearly established by the Copyright Office's
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`grant of the Certificates and based on the Copyright Office's judgment. As a consequence, "[t]he
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`burden therefore rests on the defendant to prove the invalidity of plaintiff's copyright." (citing
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`Oboler v. Goldin, 714 F.2d 211 (2d Cir. 1983); Hasbro Bradley, Inc. v. Sparkle Toys, Inc., 780
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`F.2d 189, 192 (2d Cir. 1985)); see also Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d
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`1001 (9th Cir. 1985), cert. denied 474 U.S. 1059 (1986)).
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`The Defendants have failed to meet their burden to prove the invalidity of Patriot's
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`copyrights. Sterling presented no evidence to show that any of Patriot's copyrights are invalid.
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`Patriot's 5856 predates the Hart Housing model 42019 by over four years. No fact in the record
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`supports Sterling's allegation that Patriot based its 3933 on the Unibilt model attached to Reed's
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`declaration.
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`2.
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`Trade Secrets
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`As for Patriot’s trade secret claims, monetary damages are inadequate for several
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`reasons. First, once Patriot’s trade secrets, confidential or other proprietary information are
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`disclosed, then confidentiality is lost forever. Second, the information that Patriot seeks to
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`protect is unique and has been developed by Patriot over years of doing business. Such
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`information constitutes trade secrets and is entitled to protection under the Indiana Uniform
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`Trade Secret Act ("IUTSA"), Ind. Code § 24-2-3-1 et seq.
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`There is also evidence that the Defendants are irreparably damaging Patriot’s goodwill
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`and reputation. Patriot has been in business since the 1970's and has built up goodwill in
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`its products and with its customers. Because of Defendants’ conduct, Patriot’s long time
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`customers are now questioning Patriot’s product line and pricing practices. Because Sterling
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`appropriated and copied Patriot’s plans, Sterling can sell virtually identical products at a
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`lower prices. Customers are now alleging that Patriot has been overcharging for its models
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`and are demanding that it lower its prices to match Sterling. (See affidavits of Ruiter and
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`Stephenson.)
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`B.
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`Injury to Plaintiff versus harm to Defendant.
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`As discussed earlier, soon after discovering that the Plaintiffs’ computer files had been
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`copied to the Defendants’ computer system, Sterling took steps to limit the access and use of the
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`Plaintiffs’ material. Among the steps taken was the creation of a “clean room,” a room which
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`was not effected or tainted by the copied computer files. Kollat testified that Sterling is not
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`using the copied computer files. If Kollat is correct, the effect of the recommended injunction
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`will not be greater than what the Defendants were already doing, not using the Plaintiffs’
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`proprietary material. As a result, the harm that Patriot will suffer in the absence of an injunction
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`is greater than the harm that Defendants might suffer if the Court grants an injunction. Patriot
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`merely seeks an injunction ordering Defendants to comply with the law.
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`C.
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`Likelihood of Success on the Merits.
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`Patriot is likely to prevail on the merits of its claims against all Defendants. The
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`evidence shows that Defendants are infringing upon Patriot’s valid copyrights. Further, by
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`copying and transferring Patriot’s computer files, Patriot’s former employees plainly revealed
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`Patriot's trade secrets, confidential and proprietary information.
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`D.
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`Public Interest
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`Both Congress (in its passage of the Copyright Act) and the Indiana General Assembly
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`(in its enactment of IUTSA) have spoken and expressly provided for injunctive relief in these
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`exact
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`situations. Cases under the Copyright Act and under the IUTSA have consistently granted
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`injunctive relief in such situations. See e.g., Hyrdraulic Exchange, 690 N.E.2d at 782; Ackerman
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`v. Kimble Int’l, Inc., 652 N.E.2d 507 (1995). Therefore, public policy is not disserved
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`by the granting of this injunction; rather, the declared policy would be furthered.
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`V.
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`Conclusion
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`Because Plaintiffs have demonstrated at least a reasonable likelihood of success on the
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`merits, that they are irreparably harmed by Defendants using their copyrights and trade secrets,
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`that the threatened injury to them outweighs the harm the injunction may inflict to Defendants,
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`and that granting the injunction will not disserve the public interest, this Court recommends that
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`Plaintiffs’ motion for a preliminary injunction be GRANTED pursuant to Fed. R. Civ. Pro. 65.
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`[Doc. No. 26]. Accordingly, the Defendants, their agents, employees, any other individuals
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`within Defendants control or supervision, and all persons or entities in concert with Defendants
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`should be enjoined from or required to do the following:
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`1. Using, copying, disclosing, converting, appropriating, retaining, selling, transferring,
`or otherwise exploiting Patriots’ copyrights, confidential information, trade secrets, or
`computer files.
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`2. Building or selling any of the models depicted in Exhibits B1, C1, and D1.
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`3. Building any houses in any state unless and until approvals are obtained relating to the
`manuals prepared by TR Arnold.
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`4. Certify that copied data and materials of Patriot’s property, confidential information
`and trade secrets on computer files and removable media (CD’s, DVD’s, tapes, etc.)have
`been deleted or rendered unusable.
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`5. Notify all dealers that models depicted in Exhibits B1 and D1 are no longer in
`production or for sale.
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`Further, this Court recommends Plaintiffs post a bond of $200,000 for issuance of the injunction.
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`NOTICE IS HEREBY GIVEN that within ten (10) days after being
`served with a copy of this recommended disposition a party may serve
`and file specific, written objections to the proposed findings and/or
`recommendations. Fed.R.Civ.P. 72(b). FAILURE TO FILE
`OBJECTIONS WITHIN THE SPECIFIED TIME WAIVES THE
`RIGHT TO APPEAL THE DISTRICT COURT’S ORDER
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`SO ORDERED.
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`Dated this 2nd day of December, 2005
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`s/Christopher A. Nuechterlein
`Christopher A. Nuechterlein
`United States Magistrate Judge
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